Why Dell Will Successfully Integrate Perot

At least a couple market analysts seem concerned about Dell’s ability to integrate and absorb its announced acquisition of Perot Systems and the 23,000 employees that come with it.

Credit Suisse’s Bill Shope says:

“Perot’s 23,000 employees represent a formidable integration challenge for Dell, and we are concerned with Dell’s limited acquisition track record.”

He also has reservations about how the acquisition might affect broader restructuring at Dell, particularly the company’s ongoing efforts to lower operating expenses. Says Shope:

“In particular, we believe Dell’s key challenge will be to prevent its operating expenses from ballooning as revenues recover in 2010. We fear that the additional burden of integrating a large services asset will add risks here.”

Jason Noland of Robert W. Baird shares Shope’s concerns about the integration challenge for Dell, noting that Dell has never digested an acquisition this big.

I want to issue a couple rebuttals.

First, I think these comments represent the myopic quarter-to-quarter mindset that preoccupies many in the analyst community. Rather than considering the big picture and Dell’s long-term viability in a market that is undergoing dynamic change, they worry about whether Dell’s operating expenditures will suffer a short-lived spike as the company assimilates an important acquisition. It’s an incredibly short-sighted view, one that misses the point behind the acquisition.

I’ll be blunt: Dell could not stand still. It had the choice of going deeper into consumer markets or strengthening its enterprise offerings. It would have been a dire mistake for Dell to plunge deeper into consumer markets. The company not only derives the majority of its revenue from sales to enterprise customers; it’s also more comfortable dealing with business customers and more responsive to their needs.

Conversely, Dell isn’t a brand prized by consumers. It’s just had too many misadventures and missteps dealing with them. There’s no reason to believe Dell buying Palm, for instance, would end any differently from 3Com’s disastrous stewardship of Palm back in the 1990s. When one also considers that the consumer market is no panacea for magical growth in the foreseeable future — unless your corporate moniker is Apple — Dell really had no choice.

At the end of the day, a company has to be true to itself.

One might reasonably object to the price Dell paid for Perot, but it’s harder to make the case that Dell shouldn’t have pulled the trigger on exactly this sort of move. With the strong services foundation Perot will provide, especially in its core healthcare and government markets, Dell now can buy and build additional products and services that can be sold into those markets. The Perot acquisition forms a cornerstone on which Dell can build higher-margin value propositions for enterprise customers, above and beyond the sale of PCs and servers.

The other objection raised by analysts is that Dell might struggle with the integration of Perot. That’s always a possibility, not just for Dell but for many other companies besides.

Even so, I am reasonably confident in Dell’s ability to make the integration work. Dell has cut its teeth on small acquisitions in preparation for a bolder move. More to the point, it has brought aboard personnel who are adept at closing, integrating, and fully assimilating major acquisitions.

Among them is David Johnson, Dell’s senior vice president of corporate strategy (or head of corporate planning and development, depending on whom you ask at Dell and the circumstances in which you pose the question). He was formerly an M&A executive with IBM.

Many of you will recall that Johnson was the subject of a fierce and litigious tug of war between IBM and Dell. That battle is ongoing, which is why Dell was adamant that Johnson was not involved with the Perot acquisition.

Okay, he might not have been involved, literally and technically, in the acquisition of Perot; but I strongly suspect he will be closely involved in the integration of Perot into Dell. Notwithstanding Dell’s legalistic and semantic tap dancing, Johnson figures to be in the integration mix, as do others Dell has brought aboard to see through exactly this type of transaction.

In summary, Dell isn’t exactly the acquisition ingenue that some analysts believe it to be.

Hitachi and Huawei Potential Bidders for Nortel Carrier Business

The consensus opinion, which I shared, was that bankrupt Nortel’s next step in its systematic dissolution would involve the auction of its Metro Ethernet Networks (MEN) business unit.

Instead, Nortel and its bankruptcy stewards have thrown a curveball, choosing to auction off its carrier-networks business first. From a Nortel press release issued yesterday:

Nortel Networks Corporation [OTC: NRTLQ] announced today that its principal operating subsidiary, Nortel Networks Limited (NNL), and its U.S. subsidiary, Nortel Networks Inc., plan to sell, by auction, the assets of its Carrier Networks business associated with the development of Next Generation Packet Core network components (Packet Core Assets). The Packet Core Assets consist of software to support the transfer of data over existing wireless networks and the next generation of wireless communications technology, including relevant non-patent intellectual property, equipment and other related tangible assets. In connection with this proposed sale, NNL also expects to grant the purchaser a non-exclusive license of relevant patent intellectual property.

As recounted at Unstrung, much of the technology in Nortel’s Carrier Networks business was developed from the acquisition of Sunnyvale, Calif.-based Shasta Networks, purchased in 1999 for cash and stock valued at $340-million. Building and extending that platform, Nortel has competed active in the mobile-data infrastructure market for the past decade, so the technology in the business unit is proven and tested.

Nonetheless, as the foregoing excepted paragraph from the Nortel press releases states, the buyer of the carrier-networks business will not relevant patents. Nortel will keep those for now, just as it kept its LTE patents. Rather than getting patents, the acquirer of the carrier-networks business will obtain a non-exclusive license to use relevant patents associated with the products and technologies included in the deal.

This approach is identical to the one Nortel took in auctioning off its wireless-business assets, eventually nabbed by Ericcsson for $1.13 billion. If you’ll remember, Ericsson procured the products and technologies comprised within the wireless business unit, but it did not get its hands on the LTE patents, which Nortel retained. Ericsson was granted non-exclusive rights to the LTE patents, however.

That provision antagonized RIM, which wanted the LTE patents and the unencumbered rights to license them on terms of its choosing. Hoping to scupper Nortel’s deal with Ericsson, RIM unsuccessfully appealed to the Canadian government on patriotic grounds, arguing that valuable intellectual-property assets were being sold into foreign hands. What was interesting about RIM’s case was that the Blackberry maker had no intention of acquiring the wireless business unit, which is involved in markets far removed from RIM’s strategic remit. Instead, RIM’s acquisitive sights were fixed exclusively on the LTE patents.

Apparently, Ericsson and RIM are set to battle for the LTE patents when Nortel decides to auction them off. Now we’ll have to wait for Nortel to decide when auction off the patents associated with its carrier-networks business, too.

As for likely candidates that will bid on Nortel’s carrier-networks business, Unstrung’s Craig Matsumoto thinks Hitachi is a probable player . He notes that Hitachi has been working with Nortel on an LTE packet-core network for Japanese operator KDDI Corp. What’s more, HItachi opened an LTE core-architecture R&D center in Richardson, Texas, next door to a Nortel R&D facility.

Just down the road is Huawei, which officially unveiled an LTE laboratory this summer in Plano, Texas. Huawei is a rising player in the wireless packet-core market, and it has plans to expand its footprint in North America. It also claims to have been granted 147 LTE patents by the European Telecommunications Standards Institute (ETSI), representing 12 percent of the 1,272 LTE patents assigned by ETSI as of August 2009.

While Huawei has the profile of a company that would bid on Nortel’s carrier-networks assets, I am skeptical as to whether it would step up to the auction plate and take its cuts.

A Chinese company with alleged close links to the Chinese government, Huawei probably would receive a rough ride from US regulators if it were to successfully bid on any Nortel assets. Even the acquiescent Canadian federal government might demur at the purchase of a Nortel unit by Huawei.

One last point: It is interesting that, as far as is known, Nortel is not seeking a stalking-horse bid for this business unit. It solicited stalking-horse bids for both the wireless business and its enterprise business.

Palm Made Right Call in Shutting Down Windows Mobile

Some analysts and investors have debated whether Palm made the right decision last week when it chose to abandon Microsoft’s Windows Mobile operating system in favor of an exclusive commitment to webOS.

In making the announcement, Palm CEO Jon Rubenstein said the following:

“Due to the importance of webOS to our overall strategy, we’ve made the decision to dedicate all future development resources to the evolution of webOS, which means that going forward, our road map will include only Palm webOS-based devices. . . .

. . . . We are going to be focusing all of our effort in the future on building webOS products. And so while there are still Centros and Treo Pros moving through the (Windows Mobile) channel right now, our future engineering efforts are based around webOS because we are absolutely confident in where we are going with webOS.”

I understand the reasoning put forward by those who questioned Palm’s decision. On a quarterly basis, Palm is suffering from steep declines in year-over-year revenue; and the Palm Pre, in limited release, doesn’t seem to be doing as well as some had expected and hoped it would.

In ending its commitment to the Windows Mobile-based Centros and Treo Pros, Palm has discouraged consumers from purchasing them. Revenue from those products will recede even faster and more severely than would have been the case had Palm chosen to allocate a modest percentage of keep-alive resources to them.

Nonetheless, while I sympathize with the position of Palm critics, I don’t agree with it. Palm had to commit unambiguously and unreservedly to its homegrown mobile OS. It isn’t a big enough company to have one foot planted in Microsoft’s Windows Mobile camp while trying to make meaningful strides with webOS. It would have tripped over its own feet.

Palm isn’t a hedge fund; it’s a technology company. It must have the courage of its convictions or risk becoming irrelevant. Palm might have become just that if it had attempted to juggle resources in a bid to marginally extend a diminishing stream of Windows Mobile revenue.

Now, though, it has a chance at survival, at emerging as a strong alternative to a smartphone market where the long-term winners appeared destined to be Apple in the consumer sphere and RIM in the enterprise realm.

It won’t be easy. An armada of Google Android-based smartphones will hit the market’s high seas before the end of this year. Those much-hyped and eagerly anticipated competitors will gain an inordinate amount of media coverage and industry buzz. Meanwhile, Apple won’t stop innovating, and RIM will continue to do its best to prevent encroachments on its enterprise turf.

Windows Mobile, though, is a spent force. I don’t see how Microsoft can revive it. The Windows Mobile 6.5 release won’t do it, and neither will next year’s Windows Mobile 7.0. The only possible road to redemption for Windows Mobile would be to refocus entirely on enterprise applications and markets and hope to chip away at RIM’s market share.

I will say it again: Microsoft has a lot of expertise and knowledge, and it remains stocked with plenty of smart people, but it doesn’t understand consumer markets. It does poorly in assessing the needs of consumers. Not surprisingly, it does just as poorly in designing and developing products for consumers.

That means Palm’s objective is to position itself as a viable top-three vendor. It has a chance if it can withstand the initial onslaught from the gaggle of Google Android licenses. Much depends, then, on whether on this impending wave of Android-based devices is favorably received. I think the initial buzz for the Android smartphones will be intense, but I wonder about their staying power — and I wonder about Google’s commitment to Android.

I’m probably in the minority, but I’m not persuaded Google will go to the mat to defend a mobile operating system that isn’t essential to its business. Google services don’t have to run on Android, as Google’s application support for the iPhone attests. Google can still generate service and advertising revenue without Android, though it would have more control over the presentation and delivery of those services and advertisements if it owns the mobile platform on which they are delivered.

If Android wobbles — if developers don’t support it with a a sufficient quantity of high-quality applications, if handset manufacturers waver if their first Android handsets don’t reach sales targets — will Google cut or run? I’m not sure of the answer.

Getting back to Palm, it will have to weather an intense storm. It will have to stay the course, it will have to get better at marketing itself and its devices, and — most important of all — it will have to win the hearts and minds of application developers and relevant content creators.

Can it succeed? I’m not Nostradamus, but Palm’s unalloyed commitment to webOS suggests it will at least put up a good fight.

With Redoubled Consumer Focus and Microsoft Deal, Yahoo Seeks Zimbra Sale

As Yahoo gears up for a major brand-marketing blitz directed at its core consumer market, it is aggressively seeking to divest properties that don’t comfortably fit within that mandate.

One of those properties is Zimbra, an open-source, web-based collaboration company that Yahoo acquired in 2007 for $350 million. To the extent that Yahoo could be said to have been promoting Zimbra, it had been pushing it as a white-label email service.

Interestingly ,that’s not necessarily how Yahoo and the rest of the world saw Zimbra when the acquisition occurred. Back then, Zimbra was perceived as a nascent productivity suite that had the potential to evolve into competition for Google Web Apps and Microsoft’s Office, which is spinning off its own web-based sibling in Microsoft Office Web Apps.

There also were imaginings that Yahoo, returned to the control of then-CEO Jerry Yang, might entertain a revivified emphasis on technological innovation.

Now, though, Yahoo has its eyes firmly fixed on consumers. It has no need for white-label collaborative-messaging offerings directed at SMB and enterprise customers. That’s especially true in light of its chummy search-and-advertising relationship with Microsoft.

As is well known, Microsoft’s Office and its web-based complement represent a powerful entry in the web-based personal-productivity sweepstakes. Notwithstanding Yahoo’s sharpened strategic focus on consumers, Microsoft could not have been thrilled about the ongoing existence of Zimbra within Yahoo. As soon as the Yahoo-Microsoft deal was struck, Zimbra’s days as a Yahoo possession were numbered.

Commentators are wondering about Zimbra’s next destination. Among the potential buyers are Google, Comcast (an early Zimbra customer), and Zimbra’s original venture-capital investors. One of those investors is Redpoint Ventures, the current professional home of Satish Dharmaraj, Zimbra’s founder and CEO.

Whoever buys Zimbra, they are not likely to pay nearly enough to allow Yahoo to realize a financial return on its investment. Like so many of Yahoo’s acquisitions, Yahoo’s purchase of Zimbra was poorly conceived and ineptly executed.

Observations on Dell’s Perot Acquisition

Dell announced this morning that it has pulled the trigger on a $3.9-billion acquisition of Perot Systems. Some observers think Dell is overpaying for Perot, whose revenues have been falling. It’s true: As a standalone entity, judged on earnings per share and business fundamentals, Perot isn’t worth the premium Dell has offered.

Still, it’s important to understand the Perot acquisition as a strategic necessity for Dell. It’s also important to consider that Dell will add incremental product sales through Perot’s accounts. Those product sales will include not only the PCs and servers Dell markets today, but also the products and technologies it will add through further acquisitions.

Strategically, Dell had two broad choices: It could go deeper into consumer products, from which it currently derives approximately 20 percent of its revenue, or it could strengthen its enterprise offerings. It wisely chose the latter.

After it has integrated and digested Perot, Dell will have a real services organization — with a stable of paying customers — that can do more than install and support PCs and servers. At that point, Dell can look at acquiring enterprise-oriented software companies whose products fit Perot’s sales-engagement model and target markets.

So, Perot helps Dell achieve an important objective, though at considerable cost.

Even with the Perot acquisition, Dell’s services division will be significantly smaller than IBM’s or HP’s. Where those organizations can go broad and deep, technologically and in terms of the vertical markets they serve, Dell will take a different approach.

Perot derives nearly half its revenue from the healthcare sector, with another 25 precent coming from the government sector. As part of its stimulus spending, the Obama Administration is pouring money into healthcare to expedite the digitalization of medical records. With Perot in hand, Dell expects to tap into some of that largesse. (The companies already had a healthcare-related partnership pertaining to electronic medical records (EMR). This acquisition could be read as a sign that the partnership was bearing fruit).

Similarly, the Obama Administration has mandated that federal governments update and upgrade their IT infrastructure. Again, Dell hopes to leverage Perot to get at that business.

In acquiring a services company that is positioned to benefit from government-stimulus funds, Dell seems to be acknowledging that following government money is a better near- and intermediate-term strategy than trying to benefit from what might be an invisible recovery in the private sector. Publicly listed companies that have managed to produce earnings this year invariably have done so on cost cuts rather than on revenue growth. Speaking of which, Dell also foresees “efficiencies” deriving from this deal.

Some detractors are criticizing Dell for buying a services firm with such a heavy dependence on two vertical markets. Actually, I think Dell saw the same thing as a positive, not a negative. Dell believes healthcare and government have money to spend, unlike many other industries that are reducing expenditures.

The move also signifies that Dell will not be making a high-profile acquisition in the consumer space. Don’t expect Dell to reach into its pocket to buy, for example. Palm. That’s not likely to happen unless Michael Dell loses his mind.

Instead, you might see Dell follow this acquisition with purchases of companies involved in information management and storage. Healthcare organizations and government departments are bureaucracies that produce copious documentation. Consequently, they have an ongoing need to efficiently manage and store documentation.

Obvious Dell acquisition candidates include CommVault, with which Dell has an OEM partnership, and GlassHouse Technologies, which also partners with Dell. Given the vertical-market orientation of Perot, Dell also might take a serious look at file-virtualization technologies.

Dell will want to push more than PCs and servers into the Perot installed base. Further acquisitions are sure to follow.

Joltid Fires New Salvo in Lawsuit Against Volpi

In a post last night, I considered — among other things — whether eBay could feasibly develop its own code to replace peer-to-peer (P2P) software from Joltid.

Doing so would achieve two objectives for eBay: it would keep Skype online, and it would enable it and Skype’s new investors to move forward with a $1.9-billion deal.

I also mentioned the increasingly biter relationship between Joltid’s principals, Niklas Zennstrom and Janus Friis, and Michael Volpi, who served as CEO and chairman of their video-sharing company Joost. He also served on Skype’s board during tenure at Cisco, where he was best known for his M&A dealmaking prowess.

He is now a partner at venture-capital firm Index Ventures, which is one of parties that hopes to acquire a majority percentage of Skype from its current owner, eBay. There lies the rub, as far as Zennstrom and Friis are concerned.

Presumably after completing their investigation into Volpi’s actions during his tenure as CEO and as chairman Joost, Zennstrom and Friis have come out swinging, filing yet another lawsuit that complicates eBay’s Skype deal.

This new instance of litigation was filed in the Court of Chancery of the State of Delaware against Volpi and Index Ventures. A press release from Joost summarizes the lawsuit concisely:

The lawsuit alleges breach of fiduciary duty against Volpi, aiding and abetting breach of fiduciary duty against Index, interference with prospective business advantage, misappropriation of trade secrets, breach of contract against Index, breach of confidence, and civil conspiracy. The suit seeks an injunction requiring the defendants to return to the plaintiffs all documents and files containing confidential information that the lawsuit alleges was misappropriated from Joost, and enjoining the defendants from making any use of the alleged misappropriated trade secrets, among other things.

We can only wonder at what underlies the legal salvos and litigious maneuverings. We don’t know what alleged breaches of fiduciary duty Joltid and Joost are ascribing to Volpi. We don’t know what “documents and files containing confidential information” or “missappropriated trade secrets” Volpi and Index are alleged to have purloined from Joost.

Could it all have something to do with the Joltid peer-to-peer software that is essential to Skype and is at the core of the preexisting licensing dispute between Joltid and eBay? If that were the case, it might explain why eBay seems reasonably confident about developing software that could be replace the Skype code it licenses from Joltid.

Whatever the facts that underlie the fracas, the conflict is intensifying.

Siemens Bid for Nortel Enterprise Offered Greater Benefit to Canada

As much as I thought the Canadian government should refrain from reviewing or attempting to overturn Ericsson’s acquisition of Nortel’s wireless business unit, I am just as adamant that it should have done more to prevent Nortel’s enterprise assets from falling into Avaya’s hands.

My objection isn’t so much to Avaya, which is taking Nortel’s enterprise business off the market to prevent a stronger competitor from emerging on its North American turf, as well as to milk the Nortel installed base for all it’s worth. Avaya is merely defending and furthering its business interests, which is what successful companies do.

No, the reason the Canadian government should have taken some action was because the competing alternative, from Siemens Enterprise Communications, offered a number of tangible benefits for the country that the Ayaya bid lacked. Just as Avaya looked out for its interests, the Canadian government should have being doing likewise. A Globe and Mail story makes the case persuasively. Here is an excerpt:

A year-long drive by a German company to create a Canadian-headquartered, $5-billion-a-year telecom equipment maker from the remnants of Nortel Networks Corp. ended in failure because of a lack of support from Ottawa, according to people close to the situation.

Plans to create a Toronto-based global tech giant by merging a Nortel manufacturing arm with that of Germany’s Siemens Enterprise Communications fell short despite the full backing of the Ontario government, according to numerous sources in the finance and telecom sectors. Instead of a domestic champion, the iconic Nortel unit is heading into foreign hands, as New Jersey-based Avaya Inc. won the unit with a $900-million (U.S.) bid.

Avaya won the Nortel unit by offering $15-million more than Siemens Enterprise, sources say, although the Avaya bid was all cash, while Siemens offered Nortel’s creditors a combination of $700-million in cash and an IOU on the remainder.

As to why Siemens didn’t outbid Avaya at auction, a source who worked on the Siemens Enterprise offer said the following:

“Avaya was willing to pay a premium to block a major rival out of its home market. We had a price we were willing to pay, and weren’t willing to go above that price.”

“But every dollar of support from EDC (Export Development Corp., an agency of the Canadian government), after the merger, would have been an extra dollar that could have gone into the bid.”

Given what was at stake — a Canadian-headquarterd telecommunications company, a significant commitment to ongoing research and development in Canada, and probably greater retention of Nortel staff than Avaya offered — one has to wonder why Canada’s federal government wasn’t more active in trying to influence the outcome.

The Globe and Mail reports that a source who worked with Nortel and Siemens said the following:

“In any other industrial company in the world, governments get the nuances of these arrangements. If this was France, they would have fallen over themselves to support this concept of a global champion in tech.”

It’s nearly impossible to argue otherwise. In this context, the passivity of the Canadian government is puzzling.

While there’s still a chance the Avaya purchase will be challenged by the Canadian government, or by regulators in Canada and the USA, the deal is likely to be consummated.

Looming RIM-Ericsson Showdown for Nortel’s LTE Patents

I never fully understood why Canada’s federal government would intercede on RIM’ s behalf to review or thwart Ericsson’s successful bankruptcy auction bid for Nortel’s wireless business unit. It didn’t make sense for the Canadian government to intrude, and, for a nice change, good sense won the day.

RIM’s appeals to Canadian patriotism were thin covers for self-serving motives. For RIM, the objective always was to get its hands of Nortel’s LTE patents and the licensing rights that accompany them. It wasn’t happy that Ericsson’s winning bid for Nortel’s wireless assets came with non-exclusive licensing rights to the LTE intellectual property.

With acquisitive designs on the patents, RIM wanted to control the terms and conditions of licensing agreements. In RIM’s view, what is the point of having a cow if the guy from Sweden can milk it whenever he wants?

RIM still wants the LTE patents, and so does Ericsson. Nortel owns about 100 LTE patents, royalties from which could generate as much as $2.9 billion over the lifespan of the technology, according an estimate provided by JPMorgan Chase & Co. estimated in late June.

China’s rising telecommunications-equipment star, Huawei, claims to have 147 LTE patents and counting. Even so, the Nortel patent portfolio is attractive, perhaps conferring more in quality than in quantity.

Nortel creditors, who’ve already done well at auction, are licking the lips with anticipation as an LTE-patent showdown looms between RIM and Ericsson — with others likely to join the fray.

Recovery or Not, Macroeconomic Fundamentals Remain Tough

Tom Foremski points to encouraging “green shoots” in Silicon Valley that Om Malik also has discussed.

We’ve all had enough of this downturn, and I understand the need for hope. Without it, we’d be dispirited or a lot worse. That said, any recovery, when it does arrive, will not be V shaped, or W shaped, or shaped like any other letter of the alphabet with a steeply ascending angle.

The macroeconomic fundamentals cited in the infamous Sequoia “RIP” PowerPoint presentation haven’t gone away. American consumers, who drive nearly 70 percent of the country’s economic activity (though some dispute that percentage), remain tapped out. More of them are without jobs than was the case before this punishing recession on steroids took hold. Given that we have slowly and somewhat imperceptibly entered a “jobless recovery,” one has to wonder at just how robust any such recovery can be.

Moreover, credit remains tight, new financial regulation will materialize, and some bankers actually are going back to being prudent bankers rather than being engineers of eclectic and exotic forms of securitized debt.

For our own sake, to avoid taking a bipolar rollercoaster ride from depression to elation and back again, we might want to temper our expectations. What we are experiencing is more than a standard-issue recession. A permanent reconfiguration of the global economy is occurring, that outlines of which can be perceived, even if much of it has yet to unfold.

Like old-fashioned bankers, we’d be wise to tread a prudent course.

Former KaZaA Engineer: eBay Can’t Replace Joltid Code

Intrigue and mystery envelope the legal battle between Joltid Ltd on one side and the current and would-be owners of Skype on the other. We know that the parties are in conflict, and that the stakes are high, but how much do we know beyond that?

I will do my best here to shed new light on the situation. First, let’s understand the context. When that’s done, I will present new information that suggests Joltid is well placed to get what it wants. I presume what it wants is full or partial ownership of Skype.

Joltid filed a lawsuit in U.S. District Court in Northern California on Wednesday. The suit alleges that eBay, Skype’s current owner, and Skype’s new investors — Index Ventures, Silver Lake Partners, Andreessen & Horowitz, and the Canada Pension Plan Investment Board – are in violation of copyright law. Owned by Skype founders Janus Friis and Niklas Zennstrom, Joltid seeks damages of more than $75 million for each day that Skype operates.

eBay says the Joltid lawsuit and the claims it contains are without merit. eBay also says it is developing software that eventually will replace the Joltid code. I have learned that might not be possible.

To understand why, one has to delve into a bit of history. Let’s start with Zennstrom and Friis, peer-to-peer impresarios who have launched a succession of varyingly successful companies in their eventful careers.

They started with software called FastTrack, which was used as the foundation for KaZaA, a P2P file-sharing company that gave the music industry fits.

After KaZaA, Zennstrom and Friis applied the same P2P principles and much of the same software foundation to web-based VoIP. That’s how Skype was born.

From there, after eBay acquired Skype in 2006, the duo of Zennstrom and Friis founded video-sharing company Joost, which eventually attracted Cisco wheeler-dealer Michael Volpi, who served as its CEO and chairman until a short time ago. The Joost joust is another bone of contention in the Skype soap opera; it seems intensely personal, and I do not pretend to fully comprehend the underlying dynamics.

It’s hugely significant that eBay did not procure Joltid’s key P2P software assets when it acquired Skype. In light of what I will disclose, that oversight turned out to be an error more egregious than most people realize. Its consequences extend beyond the current sequence of litigation, which began earlier this year, in the UK, when Skype filed a claim against Joltid.

This is where I have some new information to offer. I corresponded by email earlier this evening with Julian Cain, a software engineer who worked on KaZaA and also is familiar with Joltid, bluemoon, and Skype. I contacted Cain because I was intrigued by a comment he made earlier this year in reply to a blog post from Tom Keating at TMCnet.

Specifically, I asked Cain whether Zennstrom and Joltid had the capability to technically bring down the Skype network. From what he had said earlier this year, and from what I’d read in a Fortune article by Roger Parloff of many years ago – which described how KaZaA brought down P2P file-sharing networks (Grokster and Morpheus) it accused of software-licensing transgressions – I had a suspicion that Joltid was more than technically capable of playing Skype saboteur.

Here’s what Cain wrote in reply to my message:

Ebay, Inc. and Joltid, Inc. are keeping a lid on the infraction. Nobody is reporting anything because they do not know the details. In fact, they (Joltid) were here in the USA last week in California, but have since departed.

But to answer your question (about whether Skype could be brought down remotely by Joltid), yes, they have the technical ability to revoke the rights of the SkyLib (a cross-platform library written in C++ that underlies the functionality of Skype on all client platforms) remotely. Joltid CAN inject algorithms into the SkyLib ad-hoc overlay network remotely. What they did with Grokster was not advanced and also didn’t use cryptographically secure methods, as they were home rolled. SkyLib does, however, use a proper PKI.

The question you must ask yourself is this: Did Joltid, Inc. hand over their Root Certificates with the acquisition of the Skype Client? No, they did not.

This is a political agenda and not what you might think.

What Cain told me in the above email is similar to the comment he contributed to a blog post by Tom Keating over at TMCnet. Here are excerpted remarks from that comment:

The FastTrack p2p library has built in code functions to disable encryption, much like revoking a signed key, just using really bad crypto code. The end result is an inoperable p2p library.

Skype wasn’t built directly from the FastTrack p2p stack, it is another source tree/ project and uses PKI properly instead of home-grown crypto code.

Joost wasn’t built from the FastTrack nor Skype source tree; it, too, is another project.

So what we have here is very simple, Joltid doesn’t and never has sold their p2p code to anyone, ever. I tried to make this public to ebay at the time of acquisition but as the first poster said it was a “rushed decision” so nobody cared.

This is a trend with Zennstrom and it is how he wins every time.

Lastly, I personally believe that they can take Skype off the Internet remotely as they did to Grokster, and since they did it to a very large audience I don’t see why this case is any different from the first.

Conclusion: Buyer beware and don’t lease software that can be disabled remotely by the vendor. Also, never purchase or lease software that is self encrypted, compressed or obfuscated because it’s not intellectual property that is being hidden, it’s always something else, and I say this because I can circumvent their “binary protection” code and what I have seen is nothing short of scary.

In subsequent correspondence I had with Cain, pertaining to whether eBay can build its own software to replace the code it licensed from Joltid, he wrote the following:

“Ebay, Inc. is not building their own technology to replace SkyLib as it’s a technical impossibility without starting over again from GUI to guts.”

If what Cain says is accurate, Zennstrom and company have the current and aspiring owners of Skype in more than just a legal bind. Some sort of accommodation will have to be reached, or Skype could be taken offline, either technically or in court.

To put it mildly, that would be an undesirable outcome for all involved.

Microsoft and Google: Different Approaches to Web Apps

As Microsoft begins previewing its Office Web Apps — lightweight, online versions of Word, Excel and PowerPoint that will compete for hearts and minds against Google Web Apps — it’s interesting to observe the divergent positioning the companies have taken.

Rob Helm, an analyst with Directions on Microsoft, does an excellent job describing the contrasting approaches:

“Google is trying to catch up with Microsoft’s desktop applications, maybe cover 80% of their functionality. But they’ve got a long ways to go . . . .

“Microsoft is instead trying to promote an adjunct to Office to use when you’re collaborating with people, and to handle some commenting and formatting, and maybe entering a little text. Microsoft has a much narrower view of what Web apps are supposed to do. They’re very carefully limiting the Web apps, so they really aren’t a substitute for the desktop.”

Initially, Google will target the federal government and its agencies. There are security, availability, reliability issues surrounding Google’s web-based applications, but the federal government might be a receptive audience, looking for cost-effective alternatives to Microsoft’s dominant Office suite.

Meanwhile, Microsoft’s approach, using Web applications as collaborative adjuncts to the Office franchise, makes considerable sense. Microsoft calculates that it will take a long time before Google is ready to tear into the Office installed base with a feature-rich web-based suite. Similarly, Microsoft knows that enterprise concerns about the availability and security of cloud-based applications won’t dissipate overnight.

In Microsoft’s view, why should it prematurely or unnecessarily cannibalize its Office franchise? The revenue implications of such a move aren’t palatable. Eating one’s own isn’t appetizing, even when it is imperative. For now, Microsoft just doesn’t feel the need. It’s hard to refute that logic.

Valley Not the Place for America’s Young and Wealthy?

More than a few denizens of Silicon Valley think they reside in the center of American wealth creation, if not the center of the universe.

According a study from market-researcher Nielsen Claritas, though, America’s young and wealthy are voting with their well-heeled feet and congregating in the environs of Washington, D.C.

First the data-center investments went east, and now the young and wealthy appear to be making the same pilgrimage.

San Francisco held the top spot in Nielsen’s young-and-wealthy rankings back in 2000, but it has slipped to third spot, falling along with dot-com fortunes. No other county in the Bay Area cracked the top ten.